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Traditional defined benefit (DB) plans make it easy for participants by specifying the monthly lifetime stream of income that retirees will receive. Unfortunately, as these pension-style programs become less-common, individuals increasingly rely on employer-sponsored defined contribution (DC) plans. This shifts the responsibility for making complex savings and investment decisions to workers and retirees.
To its credit, the finance and investment community has done a good job of providing better solutions, tools, and services, such as automatic enrollment, to help more workers save. Through innovations like target date funds (TDFs), they have even made investment decisions easier for the average individual. Yet much remains to be done in the area of providing effective and understandable lifetime income solutions to manage the use of those savings in retirement. Workers increasingly expect their retirement plans to help them not only save for retirement, but also turn their savings into retirement income that will last a lifetime.
Many options exist for retirees to generate retirement income, and research by the Georgetown Center for Retirement Initiatives (CRI) has explored six of them. However, retirement savings plan sponsors have been slow to include such lifetime income solutions in their plans and make them easier for individuals to adopt.
What are the obstacles?
The barriers to progress on this front lie more in structural and regulatory issues than in any lack of willingness or desire on the part of plan sponsors. A recent survey by Willis Towers Watson (WTW) found that only 30% of plan sponsors have adopted a lifetime income solution for participants, but many plans also indicated they would like to increase the options and access for transitioning from accumulation to decumulation of retirement savings in the future.
Understandably, plan sponsors want to do the right thing for savers and help their workers turn savings into a steady stream of post-retirement income, but they hesitate to do so if they are concerned about implementation challenges and fiduciary risk. Some examples of the issues facing plan sponsors today include:
Plan Asset Retention
Many existing plans steer retirees into lump sum distributions, either by making it the easiest choice or by having a plan that isn’t designed to retain participants’ assets. To deliver more-flexible options, plan sponsors must be willing to retain assets for longer periods of time and structure their programs accordingly.
Administrative Complexities
Recordkeepers have not made necessary investments to develop the back-end technology, systems capabilities, and associated support needed to administer the guaranteed components of lifetime income solutions. This also can make the portability of a participant’s guaranteed lifetime income benefit more challenging. In fact, the WTW research found this to be the most-widespread hesitation among plan sponsors, with 69% expressing concern about the administrative complexities, including portability. However, recordkeepers and providers are likely to make the necessary investments if plan sponsors are more willing to adopt lifetime income solutions.
Fear of Litigation
Whenever the specter of lawsuits looms, employers can be expected to tread cautiously. Even though the U.S. Department of Labor (DOL) has issued a safe harbor that allows annuities to be included as a qualified default investment alternative (QDIA) in DC plans, plan sponsors have been hesitant to adopt such options because of litigation risks and uncertainty about whether they are meeting required fiduciary standards.
Learning from Early Adopters
In a recent webinar hosted by CRI, David O’Meara of Willis Towers Watson expressed a sentiment shared by many retirement savings experts when it comes to lifetime income solutions: “We don’t want to make the perfect the enemy of the good.” He added that “there has been some action to date, but this action needs to continue to be facilitated by market leaders.”
Some early adopters are providing valuable lessons for plan sponsors to consider.
United Technologies (UTC) has 141,000 participants in its defined contribution retirement plans with more than $25 billion in total assets. As a worker ages, the contributions and the company match are automatically invested in target date-style funds until age 48, when the portfolio of assets begins to transition gradually to position for retirement income generation until age 60, when the entire balance and subsequent contributions transfer to secure a guaranteed lifetime income benefit. The UTC approach includes innovative provisions that preserve liquidity for unanticipated events even as it ensures steady income for life.
Another large employer, International Paper, has been offering its 49,000 participants an increasing range of lifetime income options in recent years. It started with a spend-down program that helped retirees manage their distributions and now includes the addition of a long bond fund and out-of-plan annuity options. The company also provides additional flexibility for participants to handle individual needs with investment, distribution, and borrowing options.
These early adopters have developed innovative solutions and created strategies to keep options simple, hold down costs for workers and retirees, and strive to communicate effectively with plan participants. Retirees are hungry for lifetime income solutions and are prepared to act when plan sponsors make such options available. These early adopters are great examples of what plans sponsors already can do today to include lifetime income solutions and help participants when they are ready to retire.
Time for Action
Unfortunately, plan sponsors have been slow to demand and adopt innovative lifetime income solutions because of litigation risks. The fear of being sued remains a serious drag on innovation and progress. Even those who have begun to adopt lifetime income solutions for their workers have indicated they would want to see “more guidance” from federal policymakers that would allow them to do even more for their workers and retirees.
Legislators and regulators must make clear to plan sponsors how they can provide the options that workers want and need without exposing themselves to undue liability. The DOL should amend QDIA rules to address a range of lifetime income solutions, issue guidance making it easier for plan sponsors to select and monitor annuity providers and encourage sponsors to adopt plan design features that include lifetime income. Congress is also considering legislation to provide greater flexibility and innovation, including establishing a fiduciary safe harbor for the selection of a lifetime income provider and facilitating the portability of lifetime income options.
The path to improved access to simple and effective lifetime income solutions exists. Plan sponsors can and should be bold and innovative and confidently navigate through the existing legal and regulatory framework to offer their workers better lifetime income options, but policymakers should do much more to remove the hurdles that are slowing the adoption of solutions that can improve the retirement security of millions of Americans.